Currency Corner: how low can the euro go?

Dominic Frisby looks at the world’s two biggest currencies – the US dollar and the euro – and picks three clear targets for traders as the euro continues to slide.

Euro coin and dollar bill © Getty Images

In today's Currency Corner, I thought I'd take another currency pair at random, and see what's what.

Rather than the obscure or the exotic, let's stick with the mainstream and go for the world's two biggest currencies the US dollar and the euro.

The world's reserve currency and also the world's most traded currency, the dollar is held by pretty much every central bank in the world. It is accepted wherever you go. It is not just the currency of the US, but effectively of the many countries that peg their currency to it.

It is also the standard by which many commodities are valued from oil to wheat to gold and their prices will often move, not because of any change in their fundamentals, but simply because the US dollar is moving.

Despite being only 20 years old, the euro is the world's second-most traded currency and its second-largest reserve currency. It is also widely pegged to, especially in Africa. It is often seen as a proxy for European economic health and, as the currency of so many different European nations with different needs and circumstances, it is heavily politicised and the subject of many a political argument.

The EUR/USD pair then, is the most traded and the most valuable pair in forex: the biggest pair in the biggest market in the world. Kind of important.

Trading this pair is known as trading the euro, especially in North America, and the pair is quoted as how many US dollars it takes to buy a euro. For example, today the price is $1.09. It takes one dollar and nine cents to buy a euro.

Below there's a chart of EUR/USD since the euro's inception 20 years ago. When the chart is rising the euro is strengthening and the US dollar is weakening. When the chart is falling, the reverse applies: the euro is getting weaker and the dollar stronger.

Chart of the euro vs the US dollar

I find this chart interesting because, basically, it splits into two eras pre-2008 and post-2008. There have been two long trends, going on for many years, on either side.

There are two clear marker prices. Peak-euro strength in 2008 when the dollar was $1.60 to the euro.

Then peak dollar strength was in 2000 $0.82 got you a euro.

In the eight years between 2000 and 2008 the dollar, effectively, lost half its strength.

We are now in a multi-year downtrend going right back the other way.

Three clear targets for the euro

Imagine what a world with an $0.85 euro will look like. Commodity prices, for one, will be on the floor. Not saying it will happen, but looking at that price action, you've got to say it's not such an unlikely scenario three or five years down the line.

Within that downtrend there is quite a nice tradable channel, which I have defined with the red lines.

The top of the channel was re-tested in 2018 and the re-test failed. Now the downtrend resumes. If we re-visit the bottom of the channel a year or two from now, we'd be somewhere below parity not so far from those extreme lows at the turn of the century.

We zoom in now to a two-year chart, taken roughly from the point at which the euro tested the upper end of that red channel in the chart above in early 2018.

Chart of the euro vs the US dollar

You can see there is a clear downtrend in place.

The sloping red line is the 55-day simple moving average it shows, in other words, the average price of the previous 55 days. It's very much sloping down.

Bottom line: the trend is down. The euro is in a bear market. You don't want to be long in a bear market.

Recommended

The currencies to bet on this year
Currencies

The currencies to bet on this year

The US dollar could be set to weaken this year, while the euro, Canadian dollar and the Swiss franc could be good bets for optimistic traders.
17 Jan 2020
The Bank of England should create a "Bitpound" digital currency and take the world by storm
Bitcoin

The Bank of England should create a "Bitpound" digital currency and take the world by storm

The Bank of England could win the race to create a respectable digital currency if it moves quickly, says Matthew Lynn.
18 Oct 2020
The charts that matter: pre-election paralysis
Global Economy

The charts that matter: pre-election paralysis

Markets are caught in the headlights as the US election approaches fast – John Stepek looks at how the charts that matter most to the global economy a…
17 Oct 2020
Sterling or bitcoin? I know which one I trust more
Bitcoin

Sterling or bitcoin? I know which one I trust more

Many people don’t understand or trust bitcoin. They don’t think it’s real money. But it’s more robust and less easy to manipulate than our national cu…
14 Oct 2020

Most Popular

The Bank of England should create a "Bitpound" digital currency and take the world by storm
Bitcoin

The Bank of England should create a "Bitpound" digital currency and take the world by storm

The Bank of England could win the race to create a respectable digital currency if it moves quickly, says Matthew Lynn.
18 Oct 2020
Negative interest rates and the end of free bank accounts
Bank accounts

Negative interest rates and the end of free bank accounts

Negative interest rates are likely to mean the introduction of fees for current accounts and other banking products. But that might make the UK bankin…
19 Oct 2020
What would negative interest rates mean for your money?
UK Economy

What would negative interest rates mean for your money?

There has been much talk of the Bank of England introducing negative interest rates. John Stepek explains why they might do that, and what it would me…
15 Oct 2020